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INVESTING IN TRUST DEEDS SECURED BY REAL ESTATE
· What is a Trust Deed Investment?
· What are the merits of Trust Deed Investing?
· Sources of Good Trust Deed Investments
· Why Borrowers need California Western Financial Investments, Inc.?
· Risk/Reward Position
· What to look for in evaluating a Potential Trust Deed Investment.
WHAT IS A TRUST DEED INVESTMENT?
A Trust Deed is a Security Instrument recorded with a County Recorder, creating a lien against Real Property (Real Estate).
Trust Deeds come in different lien positions, such as first trust deeds, second trust deeds, third trust deeds etcetera. This has to do with the priority of recording of the trust deed against the property.
A Trust Deed Investment is the making of a loan to a borrower who executes a Promissory Note and Deed of Trust secured by their Real Property. If the borrower fails to pay the loan as promised, the Deed of Trust allows the lender to take possession of the property through a foreclosure procedure and, ultimately, resell the property to recapture invested capital.
California Western Financial Investments, Inc. raises funds for Trust Deeds from private sources such as individuals, pension funds, and IRAs, as opposed to institutional sources such as banks and savings and loans.
WHAT ARE THE MERITS OF TRUST DEED INVESTING?
Generally produces Monthly Income
Yields of 10 to 18% per annum
Management is minimal
Security of your capital is excellent depending on the type of Trust Deed Investment you choose!
Diversification - Invest in many trust deeds with properties in varying locations, with different maturity/due dates.
WHY BORROWERS NEED California Western Financial Investments, Inc.
FROM A BORROWER'S PROSPECTIVE:
WHY TAKE A PRIVATE MONEY LOAN?
Quickness of funding.
Need a short-term loan?
Borrower has circumstances making it difficult to obtain an institutional loan, including but not limited to;
Credit Problems (minor to moderate)
Tax Liens (federal & state taxes, estate taxes, etc)
Other Liens (judgment liens, homeowner's associations, property taxes, etc)
Borrower has an opportunity to invest in something else using the equity in his/her real estate.
Property held in Probate, Trusts, Family Limited Partnerships, Irrevocable Trusts, etc.
Divorce, Medical Emergency, Unemployed.
Property has circumstances making it difficult to obtain an institutional loan, including but not limited to;
Partially or nearly completed building
Loan is needed to improve the property
Loan is needed to increase occupancy of income property
Seismic retrofitting
Regulatory prohibition of conventional sources.
Non-compliance with secondary market guidelines.
Common sense underwriting.
MOST COMMON TYPES OF TRUST DEED INVESTMENTS INVESTORS ASK FOR.
Single Family Residence
Income Property
Land and Vacant Lots
Discounted Notes
Note Hypothecations
RISK/REWARD
1st Trust Deeds
Type of Property MAX LTV
Single Family Residence 75%
Condominiums 70%
Apartments 65%
Commercial & Industrial 65%
Construction 65% (Single investor)
Land 50%
Discounted Notes 60%
Collateralization or Note Hypothecation 60%
2nd Trust Deeds
Type of Property MAX LTV Yield
Single Family Residence 65%
Condominiums 65%
Apartments 65%
Commercial & Industrial 60%
Discounted Notes 60%
Based upon good quality Trust Deeds. Yields may vary for short-term loans and unique circumstances.
(LTV = Loan to Value)
WHAT WE LOOK FOR IN EVALUATING A POTENTIAL TRUST DEED INVESTMENT:
APPRAISED VALUE
Independent Fee Appraisal
Three Approaches - Replacement Cost, Market Approach, and Income Approach
Rental Survey if applicable
Feasibility study where required
Loan to Value Ratio / Protective Equity
The ratio between a mortgage loan and the value of the property pledged as security is usually expressed as a percentage.
LOAN = LTV $30,000= 30% (LTV)
VALUE $100,000
This essentially means that the loan expressed as a percentage of value is 30%. The higher the loan to value ratio, the greater the lending risk because the protective equity declines as the LTV increases.
Independent Third-Party Appraisers vs. In-House Appraisers
CWFI, Inc. only uses appraisers who are licensed by the California Department of Appraisal Services.
BORROWER CONSIDERATIONS
Can the borrower make the monthly payments
Borrower's Credit Application
Financial Statements
Credit Report - History
Other Assets and Obligations
Personal Interview and Interaction
Can the borrower evidence his/her ability to make the monthly payment.
Verifiable Income vs. Unverifiable Income
Tax Returns vs. No Tax Returns
Bank Statements
DEBT TO INCOME RATIO
The debt to income ratio is the percentage of the borrower's income that goes toward the borrower's debts.
Total Monthly Debt = Debt Ratio $3,000 = 50%
Total Monthly Income $6,000
ADDITIONAL FORMS OF COLLATERAL
Record a Trust Deed on multiple pieces of property owned by the borrower to secure the Note.
Friend or relative sign on the Note and record a Deed of Trust against their property.
Personal Guarantees.
Assignments of Notes and Deeds of Trust securing other real estate.
Irrevocable letters of credit drawn on major banking institutions.
UCC-1 Filing on personal property such as furniture, fixtures, equipment, stock, and accounts held by CWFI, Inc. Assignment of life insurance policies, leases, pink slips on autos.
EXCEPTIONS TO USUAL UNDERWRITING CRITERIA
Short Term Loans (Interim or bridge financing)
Small Loans
Quickly Amortizing Loans
Extremely Bad or Extremely Good Credit
Additional collateral considerations
EXIT STRATEGY
When the loan becomes due, there is a pay off strategy.
Extend loan term
Refinance with an institutional lender
Sell the property - use net proceeds to pay off loan.
Borrower obtains other funds to facilitate payoff
ADDITIONAL DUE DILIGENCE BY California Western Financial Investments, Inc.
Coordinate the escrow function
Title Insurance (See #N Below)
Makes sure the property is free of other liens and encumbrances.
Explanations of title items and issues
Fire Insurance policy in place, flood or construction insurance where necessary
Tax Service - Property Taxes
Environmental Site Assessment (ESA Phase I, II, III and Remedial Action Plan)
Toxic Substances
Asbestos
Lead Based Paint
WHAT YOU CAN EXPECT IN YOUR INVESTMENT PACKAGE FROM CWFI, Inc.
In order for you, as an investor, to make an informed decision, we are diligent in supplying the following:
BEFORE YOU INVEST
Loan Summary of the Trust Deed investment
Appraisal from independent, certified appraiser with original photographs and area location map
Loan Application of the borrower
Credit Report of the borrower
Borrower Escrow Instructions
If your loan will be in second position, we always get a copy of the first position Promissory Note
Preliminary Title Report
Written explanation of what items will be removed and which items will remain at the close of escrow.
UPON SIGNING (pre-closing paperwork)
Lender Escrow Instructions
Lender Purchaser Disclosure Statement - State of California required form
Loan Servicing Agreement
In the cases of a multi-lender transaction with more than 10 investors, and in other cases as required under the Securities Laws of the State of California.
AFTER CLOSING
Prorated interest check (if applicable)
Copy of Promissory Note and Assignment
Copy of recorded Deed of Trust and Assignment
Fire Insurance Endorsement showing you as Mortgagee/Loss Payee (if applicable)
Note: In ALL cases where there is more than one (1) investor, CWFI, Inc. will retain the ORIGINAL documents on behalf of all the investors in our fireproof safe.
HOW TO INVEST
One Investor owns 100% of the Trust Deed.
Multi-Lender (from 2 to 10 Investors with the Note and Deed of Trust assigned to each investor showing their respective undivided interest). Investors purchase a fractional interest in the loan. Rules are in compliance with The Business & Professions Code 10229 of California.
WHO MAY INVEST
Individuals, IRAs, Keoghs, 401K Plans, Family Trusts, Corporations, Foreign Trusts, REITs, Limited Partnerships, and Mortgage Partnership Pools.
LIEN PRIORITY
Matter of date and time of recording at the county recorder's office.
Delivery of documents without recording.
Other recorded items after closing that would be junior to your trust deed.
Federal or State tax lien
Judgments
Homeowners dues
Items recorded after your trust deed but could still be senior to your interest.
Property taxes
Subordination of liens - to make junior to another lien by agreement. "Subordination Agreement"
INVESTING IN FIRST TRUST DEED POSITIONS - "FIRSTS"
65% of the trust deed investments offered by CWFI, Inc. are first trust deeds because of the far greater security of being in first position. A first position loan is subject only to county property taxes.
INVESTING IN JUNIOR TRUST DEED POSITIONS - "SECONDS" - Senior Lien information is very important!
Balance due on senior trust deeds
Terms of senior promissory notes and trust deeds
Is there a prepayment penalty?
Is there negative amortization?
Payment history of senior trust deeds
Status of payments. Is the borrower current on his payments. Get a Beneficiary Statement or a recent Lender Statement that shows whether the senior loan is current.
SERVICING BY CWFI, Inc.
Collect monthly payments and disburse to Investors
Carry out services as agreed in Loan Service Agreement
Keep original documents on Multi-Lender transactions in a Fireproof Safe.
Notify senior lienholder (if applicable)
Collect Late Fees (generally 10% of the payment amount)
Balloon Payment Notices to borrowers when loan is due
Communicate with borrower at various stages of the loan
Coordinate loan payoff procedures and Reconveyances
IF PROBLEMS OCCUR - "WHEN THINGS GO WRONG"
You can rely on CWFI, Inc. to:
Initiate foreclosure proceedings, if necessary (file an NOD - Notice of Default)
Choose an attorney if borrower files a bankruptcy, Chapter 7, 11, or 13. Investor pays attorney's fees.
Check on senior lienholder status, property tax status, and make sure hazard insurance remains in effect.
Arrange Forced Insurance if needed.
If in a junior position, advise investor, when necessary, to advance funds to keep the senior loan current due to borrower's delinquency.
Discuss work out arrangements with borrower through lower payments, extending the loan or modifying its terms.
Discuss Deed in Lieu Of Foreclosure.
Locate a Realtor to market the property if the property reverts back to the Investor through foreclosure.
TITLE INSURANCE
The risk elimination aspect of title insurance benefits the policyholder in two ways:
It minimizes the chances that adverse claims will be raised against borrower's title - claims that might jeopardize borrower's ownership or use of the property.
It reduces the number of claims that arise and have to be defended or satisfied by the title insurance company, thereby keeping down the costs and the premiums.
Of course, not all risks can be eliminated by a title search. Certain "hidden defects", such as forgeries, identity of persons, incapacity, lack of competency, failure to comply with the law, and status (marital, partnerships, unincorporated companies, etc.), cannot be disclosed by an examination of the public records. Coverage against such "hidden defects" is provided to the insured by the title insurance policy.
Basic coverage protects against numerous risks. The following items include those covered by the policy:
Mistakes in interpretation of wills or other legal documents
Impersonation of the real owner
Forged deeds, releases, etc.
Instruments executed under a fabricated, or expired, Power of Attorney
Deeds delivered after the death of a grantor or grantee, or without the consent of the grantor
Undisclosed or missing heirs
Wills not probated
Deeds and mortgages by persons of unsound mind, by minors, or by persons supposedly single but actually married
Birth or adoption of children after the date of a will
Mistakes in recording of legal documents
Want of jurisdiction over persons in judicial proceedings affecting the title
Errors in indexing of public records
Falsification of records
Confusion arising from similarity of names
The California Land Title Association now lists with the Insurance Commissioner of the State of California, 10 policy forms, more than 120 endorsement forms, and numerous binder and guarantee forms.
What is the difference between an ALTA policy and a CLTA policy?
A CLTA only covers all items currently of record.
An ALTA policy insures access to and from public streets from the property, very important where the subject property is vacant land, and insures off record items such as encroachments, or incorrect property lines.
PRELIMINARY TITLE REPORT
You should not consider a PRELIM as providing you with reasonably current information, unless it is dated within 90 days of your examination of the report. Therefore, we provide an amended and current PRELIM dated as closely as possible to your commitment to fund a loan and purchase a promissory note.
The current PRELIM will provide the following information regarding the Property:
The name(s) of the owner(s);
Legal description, street address (if available), and assessor's parcel number of the subject property;
Assessor's plat map, which illustrates the configuration, dimensions, and general location of the property.
Assessed valuation;
Existence and priority of liens and encumbrances;
The name of the owner(s) of existing lien(s), e.g., the owner of record of any deed of trust (lien) which you may be purchasing or subordinating to;
Requests for notices concerning status of the liens, Notices of Default (NOD), and Notices of Trustee's Sale (NOS);
Notice of a lawsuit or bankruptcy affecting the property; and
Potential off-record interest of a spouse or other party.
In reviewing the current PRELIM for the aforementioned information, we are alerted to various problems which might affect the market value, equity in the property, and the security for your loan. If any of the following issues are encountered, we ask the title officer for a full explanation:
The borrower is not the owner, or the borrower is only one of the owners of record, or a person other than the borrower has an unrecorded interest in (or claim against) the property and does not execute the loan documents;
The ownership (estate) is other than fee title (e.g., a leasehold estate), or there is an exception noted regarding the deed transferring title to the property to the present purported owner of record;
The property does not have direct access to a public road, has only easement access, or is unusually configured;
There is a substantial difference between assessed and appraised value of the subject property, or the assessed valuation does not include improvements (IMPS) while the appraisal report includes both land and IMPS;
There are: (a) taxes, assessments, or association dues unpaid or delinquent; and (b) Deeds of Trust, judgment liens, claims, or bonds which may or may not be discharged from the proceeds of the loan;
The existence of an NOD or NOS not rescinded when the lien is not being removed by the proceeds of the loan. Note: A default may indicate that the borrower's capacity and desire to repay the loan is in question, and/or that the security for your loan may be impaired unless the Notice of Default or Notice of Sale of the senior lien which is to remain is rescinded.
There are encumbrances remaining that have not been explained or considered;
There are unresolved lawsuits and active bankruptcies; or
The owner of record of the Deed of Trust securing the Promissory Note you are purchasing is other than the person from whom the purchase is being made.
If you have any questions concerning the PRELIM, please ask us for assistance.
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